Question

Analysis and Interpretation of Profitability
Balance sheets and income statements for 3M Company follow.

Consolidated Statements of Income
Years ended December 31 ($ millions)	2007	2006	2005
Net sales	$24,462	$22,923	$21,167
Operating expenses
Cost of sales	12,735	11,713	10,408
Selling, general and administrative expenses	5,015	5,066	4,631
Research, development and related expenses	1,368	1,522	1,274
Loss/(gain) from sale of business	(849)	(1,074)	--
Total operating expenses	18,269	17,227	16,313
Operating income	6,193	5,696	4,854
Interest expenses and income
Interest expense	210	122	82
Interest income	(132)	(51)	(56)
Total interest expense	78	71	26
Income before income taxes	6,115	5,625	4,828
Provision for income taxes	1,964	1,723	1,627
Net income including noncontrolling interest	4,151	3,902	3,201
Less: Net income attributable to noncontrolling interest	55	51	55
Net income	$ 4,096	$ 3,851	$ 3,146

Consolidated Balance Sheets
($ millions)	2007	2006
Assets
Current Assets
Cash and cash equivalents	$ 1,896	$ 1,447
Marketable securities-current	579	471
Accounts receivable-net	3,362	3,102
Inventories
Finished goods	1,349	1,235
Work in process	880	795
Raw materials and supplies	623	571
Total inventories	2,852	2,601
Other current assets	1,149	1,325
Total current assets	9,838	8,946
Marketable securities-noncurrent	480	166
Investments	298	314
Property, plant and equipment	18,390	17,017
Less: Accumulated depreciation	(11,808)	(11,110)
Property, plant and equipment-net	6,582	5,907
Goodwill	4,589	4,082
Intangible assets-net	801	708
Prepaid pension benefits	1,378	395
Other assets	728	776
Total assets	$ 24,694	$ 21,294
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 901	$ 2,506
Accounts payable	1,505	1,402
Accrued payroll	580	520
Accrued income taxes	543	1,134
Other current liabilities	1,833	1,761
Total current liabilities	5,362	7,323
Long-term debt	4,019	1,047
Pension and postretirement benefits	--	--
Other liabilities	3,566	2,965
Total liabilities	12,947	11,335
Equity
3M Company shareholders' equity	9	9
Additional paid-in capital	2,785	2,484
Retained earnings	20,316	17,933
Treasury stock	(10,520)	(8,456)
Accumulated other comprehensive income (loss)	(843)	(2,011)
Total 3M Company shareholders' equity	11,747	9,959
Noncontrolling interest	--	--
Total equity	11,747	9,959
Total liabilities and equity	$ 24,694	$ 21,294

(a) Compute net operating profit after tax (NOPAT) for 2007. Assume that the combined federal and statutory rate is: 35.9% (Round your answer to the nearest whole number.)
2007 NOPAT =Answer($ millions)

(b) Compute net operating assets (NOA) for 2007 and 2006. Treat noncurrent Investments as a nonoperating item.
2007 NOA =Answer($ millions)
2006 NOA =Answer($ millions)

(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2007. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)  

2007 RNOA =Answer%
2007 NOPM =Answer%
2007 NOAT =Answer

(d) Compute net nonoperating obligations (NNO) for 2007 and 2006.
2007 NNO =Answer($ millions)
2006 NNO =Answer($ millions)

(e) Compute return on equity (ROE) for 2007. (Round your answers to two decimal places. Do not round until your final answer.)
2007 ROE =Answer%

(f) What is the nonoperating return component of ROE for 2007? (Round your answers to two decimal places.)
Hint: Use your prior rounded answers to compute this answer.
2007 nonoperating return =Answer%

(g) Which of the following statements reflects the best inference we can draw from the difference between 3M's ROE and RNOA?

ROE > RNOA implies that 3M has taken on too much financial leverage.

ROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt.

ROE > RNOA implies that 3M's equity has grown faster than its NOA.

ROE > RNOA implies that 3M has increased its financial leverage during the period.

Answer 1

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calculate NOPAT ( Net operating Profit after tax)- 2007
Computer Federal & Statutory tax= 35.9%
Ans-a		2007($ Mio)	2007($ Mio)	2007($ Mio)
	Operating Income			6,193
	Less
	Provision for tax		1,964
	Interest Expenses ( net)	78
	Tax on (35.9%* Interest Expenses ( Net)=35.9%*$78 Mio)		28	1,992
	NOPAT			4,201
Ans-b	Net Operating Asset ( NOA)	2007($ Mio)	2007($ Mio)	2006($ Mio)	2006($ Mio)
	please see following item need to consider while calculating NOA
	Total Asset		24,694		21,294
	Less
	Cash and cash Equivalent	1,896		1,447
	Current part of Marketable Securities	579		471
	Investment	298		314
	Marketable Securities - Non Current	480		166
		3,253	3,253	2,398	2,398
	Net Total Asset		21,441		18,896
	Total Current Liability		5,362		7,323
	less
	Short term borrowings +Current portion of long term debt	901	901	2,506	2,506
	Net Current Liability		4,461		4,817
	Net Position		16,980		14,079
	Less
	Other Liability		3,566		2,965
	NOA		13,414		11,114
		2007($ Mio)	2007($ Mio)
	RNOA
	NOPAT/Average of NOA
	Average of NOA	2007($ Mio)	2006($ Mio)	Avergae ($Mio)
	As above	13,414	11,114	12,264	($13414+$11,114)/2
	NOPAT as above)	4,201
	RNOA= NOPAT/Average of NOA	34%	($4201/$12264*100%)
	NOPM
	NOPAT/Net Sales
	NOPAT( as above)	4,201
	Net Sales	24,462
	NOPM %	17%	($4201/$24462*100%)
	NOAT
	Net Sales / Aveg of NOA
	Net Sales	24,462
	Avg NOA	12,264
	NOAT	1.99	Times
Ans D	Non Operating obligation(NNO)	2007$ Mio	2006$ Mio
	Short term borrowings +Current portion of long term debt	901	2,506
	Long term Debt	4,019	1,047
	Total Liability	4,920	3,553
	Cash and cash Equivalent	1,896	1,447
	Current part of Marketable Securities	579	471
	Investment	298	314
	Marketable Securities - Non Current	480	166
	NNO	1,667	1,155
Ans E	ROE
	Return on Equity	2007$ Mio
	Return -Net Income ( Excld - Non controlling Interest)	4,096
	Total Equity ( Average Equity	2007$ Mio	2006$ Mio	Avergae ($Mio)
		11,747	9,959	10,853
	Return on Equity	38%	($4096/$10853)
Ans F	Non Operating Return component 2007
	Return on Equity( as above)	38%
	RNOA ( return on Non Operating Asset )	34%
	Non Operating Return component 2007	3%
Ans g	Option 2 - ROE > RNOA ( as above))
	3 M is able to borrow more money
	to fund operating asset that yield a return greated than
	cost of debt